Six investment megatrends that will shape long-term returns

This article appeared in the May 2014 ASX Investor Update
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The implications for SMSFs, in particular, can be huge.

By David James, Personal Super Investor

The daily round of investment news is of great interest to some investors. Traders try to read what it means for the markets, often trying to derive gains by betting how the crowd will react. Larger investors may change their portfolio allocations towards different stocks or sectors based on what the news indicates might happen.

But for many self-managed super fund (SMSF) investors - and retail investors with a long-term orientation - short-term news is not especially significant. What matters are trends, especially for younger self-managed super investors who will not see the returns until much later.

Here are six megatrends, and a brief examination of the investment implications for SMSF investors. Picking how these trends will affect investments often proves problematic - especially if you are focusing on buying shares in Telstra or the big banks. But these trends will affect the markets over the long term and SMSF investors should consider them.

1. Creative destruction

One of the things to emerge from the global crisis of 2007-08 is that many of the older industries came under pressure, but some companies with newer business models, such as Apple and Amazon, did not. Analyst Christopher Selth argues that the world is at the end of a long economic cycle, what is termed a Kondratieff wave. "The basic idea is that innovation creates systematic changes to an economy. There is a productivity revolution, which reduces inflation. The fall in inflation reduces interest rates," Selth says.

"New businesses start destroying the old businesses: you get Amazon destroying traditional retail malls. There are new jobs and new sectors, a sharp drop in the old sectors. That is what Joseph Schumpeter, the famous Austrian economist, called creative destruction of capitalism.

"The flip side is a credit boom because of low interest rates. So not only do you get winners initially in the new industry, you also get debt expanding, so you get building booms.

"We have an economy that is still being driven by these new productive business models and if you look over the course of this cycle, a number of these businesses continue to do very well. The most famous is Apple and Amazon. Apple iPhones were selling in huge quantities even in the heart of economic despair."

2. New sciences

The advance of science is creating lasting changes. There will be products that we have not seen before. For example, scientists have developed so called "iron plants" by injecting nanotechnology into plant cells. Applications could eventually include self-powering and self-repairing phones or buildings; trees that double as cell phone towers; and a new type of fuel cell.

Equally, the dividing line between the human, the natural and the machine is being blurred. This will especially change the health sector. Organs created by 3D printers remain a long way off, but there are many intermediate advances that are creating new products. There may be massive advances in computer technology.

Professor Lloyd Hollenberg, deputy director of the Australian Research Council Centre of Excellence for Quantum Computation and Communication Technology, at the University of Melbourne, envisages a situation where quantum computing is leading to a completely new class of technology. "The far flung future of this new quantum technology is the construction of a full-scale quantum computer, potentially a leap forward in information processing far greater than the development of the modern computer," Hollenberg says.

From an investment point of view, picking the new sciences that will do well is high risk and problematic. Great innovations do not necessarily lead to great companies. Trying to spread investments across a range of areas is probably the soundest strategy. But there will be profound changes and they will affect investment options.

3. Ecological distress

There may be differing opinions about global warming, but few disagree that pollution is a problem for the future of the world. Many of the businesses of the future will be addressing this. In effect, they will be unwinding the impact of the industrial era.

The French sociologist of science, Bruno Latour, noted in his Gifford Lectures that human civilisation has modified the flows of all the rivers, the catchment areas of the world, and it is the main agent in the production and distribution of the nitrogen cycle.

Other problems such as deforestation, soil erosion, acidity in the oceans and species destruction will create lasting problems. What were considered great achievements in mastering nature during the industrial era is now regarded as the problem. Businesses that find ways of dealing with these problems will be the most successful in this era of a man-made world.

4. Ageing

Australia's population, along with much of the developed world and China, is ageing, both because of lower birth rates and increased longevity. The ageing of a developed country's population is one of the biggest predictors of long-term economic trends - especially house prices. In a number of developed economies, property prices peaked when retirees started to outnumber those in the workforce, the so-called dependency ratio. In many developed countries - the United States, Britain, Spain and Ireland - property prices started to turn down when the dependency ratio turned down.

The effect was especially extreme in Japan. Property prices eventually halved after the dependency ratio turned down (although this was partly due to unique circumstances). Australia's dependency ratio has hit the trigger point, suggesting investors should be wary of areas such as retailing to younger consumers or property. Equally, the health sector and products servicing the aged should be strong.

5. Energy and resources

If there is one good bet in the future, it is that there will be a need for more energy. But exactly how this will be provided remains unknown. What is most likely to occur is that transitional energy solutions - such as coal seam gas - will thrive for at least a decade, but eventually the various renewable energy sources will take over.

Water will also be an issue, although it will be mainly a matter of improving management techniques. In developed countries it will mainly be a matter of price because of improvements in filtering technology.
From an investment point of view, picking the right energy options will be crucial. Whoever will be the "winner" in the energy race will give handsome returns to investors.

6. Education

Digital technology is profoundly changing the education "industry". Innovations such as Massive Open On Line Courses - free tertiary courses that do not necessarily lead to a formal degree - or the Khan Academy for secondary school students, are profoundly altering classroom teaching.

Selth says: "Education is becoming to a potential productivity revolution. You are not only getting data services, you are getting the beginning of changes in key structures, some really big business and economic initiatives."

ASX Investment videos feature some of the market's best commentators, and are a great way to stay in touch with market trends.

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